Why Early Prevention is Better Than the Cure with Healthcare Supply Utilization Management

Robert W. Yokl, Sr. VP, Supply Chain & Value Analysis — SVAH Solutions

We all get excited when we identify a nice big utilization and/or value analysis savings opportunity. We get even more excited when we can make effective change with value analysis and utilization management tools to drive out these savings and show major results for our organizations. But there is a major point to these savings opportunities that may not be apparent to everyone. What should be  apparent is the fact that this has been happening over a long period of time and thus has been damaging the organization’s bottom line. If these big savings opportunities had been found earlier by making a simple correction, wouldn’t that have been better?

How Long Has the Big Savings Opportunity Been There?

Let’s say you find $255K (on a $1 million annual spend) in savings in endomechanical costs, $422K (on a $650K annual spend) in pulse Oxisensors, $700k (on a $1.6 million annual spend) in outside reference lab, or any other supply or purchased service utilization savings. Ask yourself, how long was this going on before we found out about it and then did something to correct it? We should be able to answer this question with any product category that we purchase with a simple utilization management system that should be in place now. Of note, the endomechanical dollars lost had gone on for two years at $510K in total, the Oxisensor dollars lost went on for three years at over $1 million, and $700K reference lab had gone on for just one year in overspend for a total of an aggregate missed savings opportunity of $2.21 million on a spend of $4.25 million. Wouldn’t it have been dramatically better for the organization if they were able to find the $2.21 million in savings when it was only a quarter ($553K) or an eighth ($276K) of the size that actually occurred? These were real savings examples at real hospitals just like yours.

Consider that hospitals purchase over 500 major categories (plus 1,000 more minor categories) in supplies and at any given time there may be utilization misalignments (waste, inefficient use, value mismatches, over-consumption, etc.). In our studies that we have performed over the past 15 years at hospitals and health systems across the country, we have found utilization misalignments in up to 75% of organizations’ 500 major categories of purchase. That could be as many as 375 major product categories that have utilization misalignments! About 80% are smaller savings opportunities and about 20% are major savings opportunities. Each should still be managed and dealt with.

What is the Model for Successful Supply Utilization Management?

One of my most successful hospital clients in supply chain utilization management over the past 10 years has adopted a simple strategy for handling supply utilization misalignments at their organization when we provide their reporting to them at their value analysis meetings. “Simple, we just work from the highest to the lowest savings opportunity,” says the Director of Clinical Operations. Keep in mind, they have bought into supply utilization management as a major savings engine for their organization and they are still on point with their GPO conversions and best contract pricing as well.

Why is this hospital so successful? Because they have saved millions and millions of dollars year over year by attacking their supply utilization savings on an ongoing basis. They don’t doubt that their opportunities are real but instead investigate them for reasons as to why unfavorable trends are occurring. If they find the root causes, they make adjustments to correct the issues. A few months ago, they saw that their reference lab was increasing by over 7%, or $18K monthly, over the past few months. If this trend kept going it could end up costing them over $220K annually. Luckily, they attacked this savings opportunity within two months of this occurring. Not only did they eliminate the $18k per month overage but they are on track to save an additional $11K per month or $132K  annually if sustained. Net results for the current year were $96K in the black on reference lab testing which included the loss and dollars gained from the positive utilization swing.

The bottom line here is that if this hospital had not had any system in place to track after and attack their supply utilization costs, then that $220K may have gone on for the entire year, or even longer, and grown larger over time. Early prevention and intervention in supply utilization management over-spends has saved them millions over the years because they can act quickly and strategically on all savings opportunities they find. There would have been dramatic damage done to their bottom line if they had not attacked these savings.

Goal: Clear the Board on ALL Major Supply Utilization Savings

There are always supply utilization savings popping up for this client and any other hospital or health system that I do business with. The difference with this hospital is that they have cleared the board of all major savings opportunities and are now working on knocking down savings that are popping up before they become major savings that can damage their bottom line if left untouched. Plus, they have become one of the best in cohort in over 40 major categories in our national benchmark database, which means that they are so good that they are the goal benchmark in their hospital cohort of like-sized hospitals. For you and your organization to have results like this, you must first start down the road of supply utilization management with systems, methods, and the right mindset to clear the board of all major supply utilization savings opportunities.